- We maintain our HOLD recommendation on Benalec Holdings with an unchanged fair value of RM0.65/share. This pegs the stock at a 55% discount to its NAV/share. Benalec reported a 93% QoQ decline (YoY: - 90%) in earnings for the 1Q FY16 (ending June) reporting quarter. Its net profit of RM1mil was only 4% of our FY16F net profit forecast of RM31mil.

- As we comb through the finer details, the YoY and QoQ decline in 1QFY16 earnings was largely attributable to a lower recognition of land sales. As a comparison, the group registered RM27mil in land sales for 1QFY6 vs RM45mil a year ago (4QFY15: RM44mil).

- Coupled with a higher charge-out of marine construction works, the pre-tax margins for its marine construction/lane reclamation division shrank to 4% vs 22% in 1QYF15 (4QFY15: 21%).

- Nevertheless, we maintain our forecast on expectations of lumpy recognitions from land sales, which are expected to materialise in 2HFY16.

- Furthermore, we expect a sequential pick-up in the progress of a RM204mil reclamation contract that the group secured for the upcoming quarters. The contract will be paid on a cash basis.

- This is supported by locked-in land sales totaling 242 acres (net) with SPAs from the group’s Malacca concessions. This translates into RM440mil worth of land sales revenue that will be progressively recognised, over the next two financial years.

- Benalec’s balance sheet remains healthy with a net cash position of RM23mil as at 30 September. In April, the group had successfully raised RM200mil worth of Redeemable Convertible Secured Bonds (7 year-tenure) to kick start its highly anticipated Tg. Piai Integrated Petroleum & Chemical Hub in Johor.

- With funding in place, Phase 1 of the reclamation works is set to commence this month. By extension, this should generate more visibility for the group in its quest to find its first maiden offtaker in Tg. Piai.

- That being said, we maintain our HOLD call on Benalec as the group’s future prospects largely hinges on its ability to monetise the deep embedded value of the Tg. Piai concession as a future oil hub.

- As the direction of global oil capex spending and its associated impact on oil storage projects remain somewhat unclear at this juncture, we would like to see more tangible progress on Benalec’s executional capabilities before reviewing our stance.

Source: AmeSecurities Research - 26 Nov 2015